Most SMSFs involve two people building up super together – often a couple. But in fact, even in the simplest case they often wear multiple hats.
That’s why we often hear the same person called a member, a trustee, a director, a shareholder or even a secretary. They might be all of the above in the same SMSF. Why? And what do all these roles actually mean?
Members
The simplest role is that of the member.
Mostly, members are the people who have their super building up in the SMSF.
We say “mostly” because actually it’s possible to have a member who doesn’t have any money in the fund right now. (Check your trust deed before assuming you can do this in your SMSF – in some funds, membership ceases automatically as soon as the member’s balance reaches $nil. This isn’t the case for the Heffron trust deed.)
One case where a member who has no balance might be a member of the fund is where an adult child belongs to their parents’ super fund. The parents want to continue their SMSF and want to play an active role as trustee. But they would like their three children to help them by being additional trustees of the fund. We’ll talk about trustees in a moment but the key here is that in this case, the children could only help run the fund if they were also members of the fund.
(You may have heard of cases where children can do this without being members if they have an “enduring power of attorney” for the parent(s). However, this is only possible if the parents actually stop being trustees entirely. If the parents want to remain closely involved, having the children join as additional members, even if they don’t put any of their super in the fund, might be a better approach.)
Trustees
The trustees are the people who are in charge of the fund. They make decisions like what suppliers the fund will use, how the money will be invested, agree to make benefit payments and more.
Normally this is the same group of people as the members – super laws generally require members to be trustees and vice versa. But even when that’s the case, it’s actually an entirely different hat they wear. Among other things, members are allowed to be self interested, trustees aren’t – when wearing their trustee hat, they have to constantly check they’re acting in the best interests of all members.
And sometimes these are exceptions to the general rule that all members are trustees and all trustees are members.
A good example is minor children. They can have money in the fund (ie they’re members) but can’t be a trustee. A parent would usually fill this role on their behalf until they turn 18. As soon as the child turns 18 they would need to become a trustee.
Someone who is mentally incapacitated (dementia, another mental impairment etc) might not be legally able to be a trustee but they could be a member as long as someone could be the trustee on their behalf. Similarly, people who move overseas often also have someone else act as trustee in their place because if they control the fund from overseas, it might stop being an “Australian superannuation fund” (which raises all sorts of tax headaches).
In both cases, there are special rules to be followed to make sure the fund still complies with super rules. Essentially these involve allowing someone else to be the trustee instead of the member. As we touched on earlier, it’s possible for someone else to fill this role if they hold an “enduring power of attorney” for the member – but they have to completely replace the member as trustee.
For example, Sherry is a member of her SMSF and also a trustee, alongside her husband Darren. Sherry has recently been diagnosed with dementia. While she hasn’t actually lost capacity yet, she feels it’s time to stop being a trustee of her SMSF. Fortunately, her daughter Chris has an enduring power of attorney for Sherry. That allows the family to reorganise the fund so that Sherry and Darren remain the only members but Chris replaces Sherry as trustee. So Chris and Darren become the trustees of the fund. Importantly, Sherry stopped being a trustee entirely. The only way the three of them could run the fund together would be if Chris became a member as well.
Finally, there are special rules for funds that only have one member. That fund sometimes needs a second person who is a trustee but they don’t need to be a member.
Directors and secretaries
These days most SMSFs set up a company to be the trustee of the fund, instead of having a group of individuals as trustee. The people we’ve so far called “trustees” are instead the directors of the trustee company. The concept is the same – they are in charge of making decisions about what happens in the fund.
Trustee companies also often have a secretary.
In a “proper” company (for example, one that carries on a business), the secretary might have important jobs to do – managing compliance and governance. This isn’t really relevant in an SMSF trustee but it can still be valuable to have a secretary. For example, directors often have to sign documents for third parties such as banks or other financial institutions. The third party can assume the document was signed by people who really can commit the company if it’s signed by two directors, one director and a secretary or – in the case of single director companies – a sole director. If it’s a sole director company, they can also be the secretary and sign in both capacities. That makes it really easy for the third party to see that the document has been validly signed, without needing to double check that the company only has one director.
In fact, when clients set up new trustee companies and there are two members and directors, we usually recommend that both are also company secretaries so that if one dies, it’s clear the other can continue to act for the company.
Note that there’s actually no legal requirement to have a secretary at all. And super law doesn’t require any particular person to fill the role. It could even be someone who wasn’t a director or member.
Shareholders
This is only relevant for funds that have a trustee that is a company.
All companies are owned by shareholders – even companies that are only set up to be the trustee of an SMSF. While the shares won’t actually be worth much, it’s still important to understand who owns them. That’s because for many companies, shareholders have the power to decide who will be the directors. This is really important because the directors will control the SMSF.
Interestingly, super law doesn’t include any rules about who can be a shareholder of a trustee company, how many shares they own or how decisions are made about directors. When we set up new trustee companies for clients, we generally suggest the SMSF members own the shares equally. Often clients choose to set the company up with a number of shares that takes into account future changes. For example, a couple with three children might set up a company with 60 shares. That way, once they have both died, their three children can inherit 20 shares each and share control of the company. Control at that point might be really important because that will be when big decisions about paying out a parent’s death benefit are being made.
It can also be useful for people who move overseas. Let’s say a couple with an SMSF both moved overseas. They wanted to remain members because they intend to return one day and feel their SMSF will be valuable then. To meet the super rules about making sure the fund is controlled from Australia, they both granted an enduring power of attorney to a relative who agreed to be the sole director of the trustee company for a time. There would be nothing to stop the members continuing to own the shares in the trustee company. In fact it would be smart to do so – it means they keep ultimate control of the trustee company. If anything happens, they can always revoke their enduring power of attorney and use their shareholder voting powers to replace the director of the company.
Once again, though, their shareholder hat is entirely different to being a director. They can’t step in and make decisions about the SMSF – that is something only the director(s) can do.
It seems like there are many hats for one small fund but each one has different rights and responsibilities. It’s important to understand them all because the right decision might be to make different calls about each one.
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